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Wolfowitz Isn't the World Bank's Biggest Problem

Written by Justin Fox, Time, USA

The World Bank is undeniably in crisis. But not because its president, Paul Wolfowitz, got his girlfriend a raise.

It is the Wolfowitz saga that has been grabbing all the headlines, of course. The Iraq-war architect was plucked from the Defense Department and deposited by President George W. Bush at the World Bank in 2005 (by tradition, the U.S. President picks the bank's chief). At the time, Wolfowitz informed the bank's ethics committee that he was seeing Shaha Riza, a communications adviser at the bank, and the in-house ethicists told him she should be moved to another agency and given a raise for her troubles. But the size of the pay hike (from $133,000 to $180,000, tax free) and other details about Riza's transfer raised hackles among bank staff and sparked an investigation. The bank's board will decide any day now whether Wolfowitz stays or goes.

This dragged-out mess, though, is a distraction. The bigger issue is that the Washington-based bank and its sister organization, the International Monetary Fund (IMF), are struggling to justify their continued existence.

The situation is most pressing for the smaller IMF, which pays its bills with the profits it makes lending money to middle-income countries in financial trouble. With hardly any such countries in trouble these days, the organization is projecting a $224 million deficit for this fiscal year and asking its member nations if it can start selling off some of the gold they deposited with it after World War II (the answer so far: no).

The World Bank isn't that desperate, but it faces similar pressures. Both organizations were created in 1944 by the soon-to-be-victorious Allied powers. At the time, says Harvard professor and former IMF chief economist Kenneth Rogoff, "global financial markets barely existed, and domestic financial markets barely existed in Europe."